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Dell says alternative offers from Blackstone, Icahn may be superior to founder’s

A pair of rival offers could threaten the future of Michael Dell, who founded the technology giant at 19 with just $1,000. (Justin Sullivan / GETTY IMAGES)

By Jessica Toonkel and Paritosh BansalReuters

Mon., March 25, 2013

Dell Inc. said it received alternative proposals from Blackstone Group LP and Carl Icahn that could be superior to the $24.4 billion offer from founder Michael Dell and private equity fund Silver Lake Partners last month.

Michael Dell is willing to explore the possibility of working with third parties regarding alternative offers, the company said on Monday.

However, Dell said the special board committee considering a sale continues to support the company’s pending sale to Michael Dell and Silver Lake Partners.

The committee was evaluating the new takeover proposals to decide whether either or both offers are likely to trump the existing take-private deal, Reuters reported on Sunday, quoting a source familiar with the discussions.

Icahn has offered $15 per share for 58 per cent of Dell, while Blackstone has proposed paying more than $14.25 per share. The Silver Lake group had agreed to buy all of Dell for $13.65 per share.

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Dell’s shares were up 4 per cent at $14.67 in heavy premarket trading on Monday.

Icahn Enterprises raised the prospect of working with Blackstone, saying the two groups had held preliminary talks.

One issue for the special committee is how to compare the three proposals. Both Blackstone’s and Icahn’s proposals envision that a portion of Dell’s stock will remain publicly traded.

Silver Lake was not reachable for comment outside normal business hours in the United States.

“We continue to believe a higher bid than the current $13.65 per share offer will likely be offered but, based on our assumptions, a $15 per share bid may be a threshold,” Wells Fargo Securities Maynard Um said in a note.

“We believe a higher Silver Lake/Dell bid might still be a more attractive and strategic option, assuming information regarding the public stub and financial services sale is accurate,” he said.

The rival bids for Dell throw the future of the PC-maker into question. A “go-shop” period — during which the target company actively looks for rival offers — for a deal of this size rarely yields competing offers. The bids now could potentially turn the sale of Dell into a three-horse race, which could drag out for months.

It also could threaten the future of Michael Dell, who founded the technology giant at the age of 19 with just $1,000. Under the Silver Lake plan, he planned to contribute his roughly 16 per cent share of Dell’s equity to the deal, along with cash from his investment firm MSD Capital, and to remain CEO of the company. Silver Lake is putting up $1.4 billion in the deal.

The Silver Lake group has no plans to increase or amend its offer until Dell’s special committee comes out with a ruling on the rival proposals, two sources close to the matter said late on Sunday. They said for now the buyout firm and Michael Dell planned to move forward with their current deal.

The shareholders have said that his offer undervalues the company and pledged to vote against the deal, which requires a majority of shareholders, excluding the founder, to pass.

Brian Marshall, an analyst at ISI Group said in a report on Sunday that he did not expect the Silver Lake group to raise its offer meaningfully above the rival bids, “given significant challenges facing the PC business and a long transformation ahead.”

Under Icahn’s proposal, Dell shareholders will have a choice of electing cash or stock, but there would be a cap on the amount of cash they could get, the source said.

In other words, if all Dell shareholders chose to cash out, they could only sell 58 per cent of their stock, retaining the other 42 per cent that will remain publicly traded.

Icahn is being advised by investment bank Jefferies Group Inc. He plans to fund his bid with his own money, Dell’s cash as well as new debt.

The activist investor, who has taken a stake in Dell, earlier this month demanded Dell pay out $15.7 billion in special dividends. He is no longer asking for that, the source said.

Jefferies declined to comment on Sunday.

Blackstone recently hired Dell’s former vice president of corporate strategy, David Johnson.

Under Blackstone’s proposal, Dell also would have a certain amount of stock publicly traded. But unlike the Icahn proposal, Blackstone has proposed buying out any shareholder that wants to cash out of Dell.

Blackstone is being advised by Morgan Stanley, which has also given it a highly confident letter of financing, the source said.

Morgan Stanley declined to comment on Sunday.

There have also been some conversations about the Blackstone group selling Dell’s financial services business, but that is not part of the current proposal, the source said.

Dell was regarded as a model of innovation as recently as the early 2000s, pioneering online ordering of custom-configured PCs and working closely with Asian component suppliers and manufacturers to assure rock-bottom production costs.

But as of 2012’s fourth quarter, Dell’s share of the global PC market had slipped to just above 10 percent from 12.5 percent a year earlier as its shipments tumbled 20 percent, according to research house IDC.

Michael Dell returned to the company as CEO in 2007 after a brief hiatus, but has been unable to engineer a turnaround thus far. Dell’s focus on corporate computing in recent years has yet to yield results, critics note.

Competing successfully against incumbents, including IBM and Hewlett-Packard, will not be easy no matter what the corporate structure.

A source earlier said that Dell had slashed its internal forecast for fiscal 2013 operating profit to about $3 billion, down sharply from the $3.7 billion it had predicted previously. The source added that more details will be revealed in a proxy filing which is expected by the end of this week.

Meanwhile, if the special committee of the board decides that either — or both — of the rival bids for Dell are reasonably likely to lead to superior offers, Icahn and Blackstone will have to present firm bids for Dell. The negotiations are likely to take weeks, the source said.

At that point, the special committee will again need to decide whether the firm bids from Icahn and Blackstone, which include features such as committed financing, were superior to the Silver Lake-Michael Dell agreement.

If they are superior, Silver Lake and Michael Dell will get one shot at revising their original bid. Unlike most other go-shop processes, where the original bidders get several chances to match rival bids, Dell has given its founder and Silver Lake the right to do so only once.

Additional reporting by Nadia Damouni and Greg Roumeliotis in New York and Sayantani Ghosh in Bangalore

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